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Banikanta Mishra
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1. FVT = PV (1 + r)T
FVT
2. PV = 1 r
1 r T
3. FVIFAr,T =
1
1
r r 1 r T
4. PVIFAr,T =
=
1
becomes r
1 r T
1
r (1 r) T ; PVIFAr,T for T = (a perpetuity)
1
T
APR
1
1 EAR N
1 x APR
, which, for N , is ln (1
ln (1 r * PVIFA)
1
ln (
)
1 r
9. Given PVIFA, get T as equal to
ln (1 r * FVIFA)
ln (1 r)
11. If roT is the EAR on a T-year risk-less zero-coupon bond and r ot is the EAR on a
similar t-year bond, then Expectation Hypothesis would imply that (1 + r0T)T = (1 +
r0t)t x (1 + rtT)T-t
[The rtT is called the forward rate; specifically, the T-t period forward-rate at t.]
For example: (1 + r05)5 = (1 + r03)3 x (1 + r35)2 [where r35 is the two-year forwardrate at t=3]
Similarly: (1 + r02)2 = (1 + r01) x (1 + r12) [where r12 is the one-year forward-rate at
year-end]
Par
13. If Coupon-Rate > = < kd, then bond's PV > = < Par
Int / Par ]
[where Coupon-Rate =
14. All else being same, price of a longer-maturity bond changes (rises / falls) more
than that of a shorter-maturity bond, for a given change in interest-rate
15. When interest-rate rises, bond value falls at a falling-rate; and when interestrate falls, bond value increases at an increasing rate.
Par P0
T
Par 2 P0
3
Ann Int
Int
P1 P0
P0
17. ERR0 on a Bond = Current Yield + Capital Gains Yield = P0
ERR0 is Expected Rate of Return, P0 is price now, P1 is price on next interest-payment
date.
If next interest-payment date is less than a year away, this return should be
annualized (EAR).
18. kd > = < Current Yield > = < Coupon-Rate
1 g
D1
PV
1
ks g
1 ks
where D1 is the Dividend at the end of the period (at t=1), k S is the discount-rate or
RRR,
g is the growth-rate of dividends, T is the life of the stock
PV
D1
ks g
21. Thus, kS
D1
= P0 + g,
D1 P1 P0
P0
And, ERR on a Stock = Dividend Yield + Capital Gains Yield = P0
[D1 is next dividend expected, P0 is current price, and P1 price on next dividendpayment date]
If next dividend-payment date is less than one year away, the return should be
annualized
In any case, if the share is fairly priced, ks = ERR, as required for equilibrium
DT
22. For a share which will not pay any dividend in the short-run, PV =
where DT is the dividend expected at some distant future date T;
for such a stock, ERR = g
1 ks T
23. F / S0 = (1+ r1) / (1 + r2) [F and S are in currency of Country 1 per currency of
Country 2; S is the current exchange-rate, F is the (agreed upon) forward-rate, and r i
is the interest-rate of Country i] // For example, if S is $ per # and F is also $ per #,
then F / S0 = (1+ r$) / (1 + r#)
1 rd
F
1 rf
24. Interest-Rate Parity: S0
[F and S are in domestic-currency per foreign-currency; S is the current exchange-rate, F is
the forward-rate, and r is the interest-rate with d denoting domestic and f foreign]
For example, if S is $ per # and F is also $ per #, then F / S 0 = (1+ r$) / (1 + r#)
[Here, r is the interest-rate between now and the maturity-date of the forward contract. So,
if F matures at the quarter-end, then r is the quarterly-rate,
while, if F matures at the end of three years, r is the three-yearly rate = (1 + EAR) 3 - 1]
This condition is the same as [( F - S0) / S0] = [ (1+ rd) / (1 + rf)] - 1
where the LHS is referred to as the forward-premium
25. If F / S0 > (1+ rd) / (1 + rf) then borrow domestic currency, convert it into foreigncurrency, and deposit/lend it and vice versa [i.e. prefer borrowing domestic currency
and lending foreign] This condition [Covered Interest Arbitrage] is same as [( F - S 0) /
S0] > [ (1+ rd) / (1 + rf)] - 1
When forward-price F is not available or not used, [(S1 - S0) / S0] > [ (1+ rd) / (1 + rf) ] - 1
implies Uncovered Interest Arbitrage; this is the same condition as: S 1 / S0 > (1+ rd) / (1 + rf)
S1 1 id
S
0
1 if
26. Relative Purchasing Power Parity:
[S1 and S0 are in domestic-currency per foreign-currency, S1 is the expected exchange-rate
at time 1, S0 is the exchange-rate now at time 0, and i is expected inflation-rate with d
denoting domestic and f foreign] For example: if S1 and S0 are in $ per #, then S1 / S0 = (1
+ iUSA) / (1 + iUK) [Here, i is qualified the way r is qualified above.]
St x
1 if
1 id = St-1 if Relative PPP holds
iM
2
i = M
30. Optimal Weight on Asset j when Asset i & j have same mean =
i (i ij j)
2j 2 i j ij
2
i
31. Re =
u
+
D
(1 t ) R u
E
(
35. Value of Levered firm (VL) = Value of Unlevered firm (VU) + PVITS
(
36. WACC =
D
E
* Rd ) (
* Re )
DE
DE
[
37. Adjusted COC =
CFL
38. VL = WACC
D
E
* Rd * (1 t )] (
* Re )
DE
DE
OR Alternatively
D
(1 t ) d
E
D
1 (1 t )
E
CFU
VL = Adj COC
e
39.
rev=
u
FC
CF